Low-Frequency Traders in a High-Frequency World: A Survival Guide

41 Pages Posted: 23 Sep 2012 Last revised: 26 May 2014

See all articles by Marcos Lopez de Prado

Marcos Lopez de Prado

AQR Capital Management, LLC; Cornell University - Operations Research & Industrial Engineering; RCC - Harvard University

Date Written: September 23, 2012

Abstract

Multiple empirical studies have shown that Order Flow Imbalance has predictive power over the trading range.

The PIN Theory (Easley et al. [1996]) reveals the Microstructure mechanism by which:

– Market Makers adjust their trading range to avoid being adversely selected by Informed Traders. – Informed Traders reveal their future trading intentions when they alter the Order Flow. – Consequently, Market Makers’ trading range is a function of the Order Flow imbalance.

VPIN is a High Frequency estimate of PIN, which can be used to detect the presence of Informed Traders, monitor liquidity conditions and forecast microstructural volatility.

Keywords: Market Microstructure, VPIN, Order Flow, Informed Traders, Liquidity Providers, Adverse Selection

JEL Classification: C02, D52, D53, G14

Suggested Citation

López de Prado, Marcos, Low-Frequency Traders in a High-Frequency World: A Survival Guide (September 23, 2012). Available at SSRN: https://ssrn.com/abstract=2150876 or http://dx.doi.org/10.2139/ssrn.2150876

Marcos López de Prado (Contact Author)

AQR Capital Management, LLC ( email )

One Greenwich Plaza
Greenwich, CT 06830
United States

HOME PAGE: http://www.aqr.com

Cornell University - Operations Research & Industrial Engineering ( email )

237 Rhodes Hall
Ithaca, NY 14853
United States

HOME PAGE: http://www.orie.cornell.edu

RCC - Harvard University ( email )

1875 Cambridge Street
Cambridge, MA 02138
United States

HOME PAGE: http://www.rcc.harvard.edu

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